SAN FRANCISCO (Reuters) - Yahoo Inc will pay investors at least half the proceeds from its Alibaba share sale when the Chinese Internet retailer goes public, and retain a larger stake than expected, helping to offset the U.S. company's disappointing results on Tuesday.Shares of Yahoo were roughly flat at $35.57 in after-hours trading.

"What you see is the fundamentals at core Yahoo continue to deteriorate, but there's at least some good news on the Alibaba front," said Macquarie Research analyst Ben Schachter.Yahoo owns about 24 percent of Alibaba Group Holding Ltd, which is expected to list its shares on the New York Stock Exchange later this year in what could be the largest ever U.S. technology initial public offering. Alibaba valued itself at $130 billion in a recent regulatory filing.

Yahoo said on Tuesday that Alibaba has agreed to its request to reduce the maximum number of shares it sells in the Alibaba IPO from 208 million to 140 million."The idea is that Yahoo shareholders can participate and benefit from the upside to Alibaba post the IPO, as opposed to just having to sell more stock in the IPO," said Schachter.

Finance Chief Ken Goldman also said in a statement accompanying Yahoo's results on Tuesday that the company was committed "to return at least half of the after-tax IPO proceeds to shareholders."

Yahoo is trying to revitalize a stagnant online advertising business as Chief Executive Marissa Mayer marks her 2-year anniversary at the Internet company.

The former Google Inc executive has revamped many of Yahoo's Web products but its ad sales are still weak while rivals such as Google and Facebook Inc continue to post strong, double-digit revenue growth.Yahoo's net revenue, which excludes fees paid to partner websites, decreased 3 percent year-on-year to $1.04 billion in the three months ended June 30. Analysts polled by Thomson Reuters I/B/E/S were looking for net revenue of $1.084 billion.

Revenue in Yahoo's display advertising business decreased 8 percent to $436 million in the second quarter. The average price per ad decreased 24 percent, while the number of display ads sold increased 24 percent.

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